A leading provider
of advanced
technology-based
security solutions
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Spectra Systems Corporation
Annual report and accounts 2017
Spectra Systems Corporation is an
established world leader in providing
security technology, from banknotes
and products to electronic gaming.
Spectra provides integrated solutions comprised
of engineered materials for authentication
and hardware and software systems
which verify the unique signatures
of the authentication materials.
WE OPERATE IN
35 COUNTRIES
WE HAVE 28 STAFF
IN OUR OFFICES
FOUR ACQUISITIONS
SINCE 2012
OVER 65
CUSTOMERS
Highlights
Financial highlights
– Revenue up 9% for the year at US$12,170k
(2016: US$11,122k)
– Adjusted EBITDA1 up 83% at US$4,349k
(2016: US$2,383k)
– Adjusted PBTA1 doubled to US$4,010k
(2016: US$1,999k)
– Adjusted earnings2 per share of US$8.8 cents
(2016: US$4.4 cents)
– Cash generated from operations
of US$4,669 (2016: US$2,805k)
– Strong, debt-free balance sheet, with cash3
of US$11,181k (2016: US$8,808k)
– Declaring annual dividend up 20%
to US$6.0 cents per share to be paid in June
1 Before stock compensation expense and exceptional items
related to inventory write downs and acquisition costs.
2 Before amortization, stock compensation expense and
exceptional items related to inventory write downs and
acquisition costs.
3 Does not include US$1,099k (2016: US$1,092k) of restricted
cash and investments.
Operational highlights
– In-house production throughout 2017
with margin uplift through consumption
of inventory previously manufactured
through contract services
– Record phosphor sales of US$4,313k
(2016: US$3,764k)
– Gross margin increased to 71% from 68%
resulting from in-house manufacturing
of covert materials, royalties and record
high-margin phosphor sales
– Reduced operating expenses by US$881k
through a planned reduction of R&D and
reallocation of internal resources to
in-house manufacturing
– Brand authentication and Secure Transactions
Group performing in line with expectations
– Completed engineering staff reductions and
facility consolidation, which will allow us to
redirect resources to increase manufacturing
capacity in 2018 to support new larger orders
and mitigate performance risk
Revenue
(US$ million)
12.2
(2016: 11.1)
Adjusted EBITDA
(US$ million)
4.3
(2016: 2.4)
17
16
15
17
16
15
1.1
Adjusted earnings
per share (US$)
8.8¢
(2016: 4.4¢)
17
16
4.4
15
1.6
12.2
11.1
14.1
4.3
8.8
2.4
Review of the year
Highlights
Spectra at a glance
IFC Corporate statement
1
2
4 Our strategy
6
Chief Executive Officer’s statement
Corporate governance
Board of Directors
Senior management
10
11
12 Directors’ report
Financial statements
1
2
3
Statements of income and other comprehensive income
Statements of stockholders’ equity
Independent auditor’s report
16
17 Balance sheets
18
19
20 Statements of cash flows
21
33
Notes to the financial information
Shareholder and corporate information
Discover more online
www.spsy.com
Our strategy
Page 4
Chief Executive
Officer’s statement
Page 6
1
Annual report and accounts 2017 Spectra Systems Corporation1 Spectra at a glance
Spectra is a highly responsive
organization that develops customized
solutions for its customers.
Our solutions
Authentication systems
Authentication systems
Secure transactions
Secure transactions
Spectra’s sophisticated capabilities allow us to invent,
develop and manufacture integrated solutions comprised
of a system of taggant materials and sensor equipment
to authenticate banknotes at high processing speeds
and brand products in the field.
Our solutions are used by:
– two G7 central banks;
– 17 other central banks for currency authentication; and
– a major G7 country for passport security.
Spectra’s Secure Transactions Group is the leading
supplier of real-time fraud control and risk management
systems to government-sanctioned gaming operators.
Currently deployed in North America, Europe and Asia,
our integrity systems monitor and audit more than
US$20 billion in annual sales for online, internet and
mobile phone-based lotteries and pari-mutuel organizations.
Our products have been engineered to provide:
– fully automated independent real-time monitoring; and
– compatibility with all gaming systems.
Our customers
Our end customers include a G7 central bank organization and one of the world’s largest commercial
security printers and papermakers, which supplies the Company’s technology to a second G7 central
bank and numerous other central banks. Additionally, brand authentication customers use our products
including several consumer goods brands, while our Secure Transactions Group provides solutions for
19 lotteries, 17 in the United States of America and two international.
Our solutions are used by:
– 19 central banks including two G7 central banks;
– commercial security printers and papermakers;
– Crane & Co.;
– suppliers of security threads for world currencies;
– LMI Packaging Solutions;
– multi-national consumer product companies;
– Governments of Turkey, India, Malaysia and Norway;
– Intralot SA;
– Scientific Games International Inc.;
– International Game Technology PLC;
– lotteries in 17 states within the United States of America; and
– national lotteries in two countries.
2
Spectra Systems Corporation Annual report and accounts 2017 We have integrated our TruBrandTM cloud-based
authentication services into the Secure Transactions
Group to create an important new growth channel as
smartphone authentication technology gains traction.
1
Smartphone authentication of product brands
Smartphone authentication of product brands
Optical materials
Secure transactions
TruBrand™ and TruNote™
Spectra’s new technology enables end users to
verify products and banknotes with a smartphone.
This technology eliminates the need for costly
readers and allows the consumer to authenticate
the product themselves.
– TruBrand™ and TruNote™ are materials-based
technologies that do not rely on easily
counterfeited images.
In the course of developing our authentication solutions
for over a decade, Spectra has created a large number
of unique optical materials which are responsive to various
forms of excitation, from light to ambient environmental
conditions, including gaseous constituents. Our materials
are finding new applications in process control,
manufacturing and consumer products.
Our markets
Spectra’s market opportunity has expanded once more with the introduction of our smartphone
authentication solutions for products, tax stamps and banknotes. The ability to empower anyone
with a smartphone to authenticate products and banknotes containing our materials transforms
the market.
Our TruBrand™, TruStamp™ and TruNote™ suite of solutions
are the only materials-based smartphone authentication
technologies in the world and rely on our proprietary materials.
This is a powerful combination of new and disruptive
technologies introduced by one company, which, in the
span of two years, has gone from concept to market-ready
products for sale and under test by large volume tobacco
suppliers in Asia.
Spectra’s current suite of portable reader-based solutions
can be used for authenticating and tracking consumer and
tax-bearing products. Our reader-based business has grown
considerably in Asia and has several recognizable brand
owners as customers.
With over 150 billion banknotes manufactured annually
worldwide and 85% of all transactions performed using
banknotes, this business has proven to be a high quality,
long-term revenue source for the Company. With 19 central
bank customers and new developed technologies, particularly
for polymer banknotes, we expect continued strong earnings
from this sector.
Spectra’s secure ICS software products have been
augmented with new capabilities since the acquisitions
and have resulted in revenue growth with existing customers
as well as with new ones. Along with the expansion in
internet-based lotteries, we expect to provide cloud-based
authentication for a potentially large number of customers
using our materials-based TruBrand™, TruStamp™ and TruNote™
smartphone authentication.
In addition, lawmakers in at least 20 states are crafting
legislation to legalize sports gambling. Our Secure Transaction
Group is poised to service these potential new markets.
3
Annual report and accounts 2017 Spectra Systems Corporation Our strategy
Capitalizing on developed
technologies and the power
of the internet for authentication.
Our solutions
Strategic aim
Capitalize on
existing suite of
developed covert
material products
Advanced smartphone
authentication
technology
Increase high-margin
Implement
specialty materials sales
cost reductions
Development strategy
Future development of covert materials
and sensors will be externally funded
Focus on polymer banknotes
Additional business from
existing customers
Leverage TruBrandTM smartphone
technology to create new revenue
streams for both materials as well
as the Secure Transactions Group
Focus on large, billion unit opportunities
Proposal issued for the development
and supply of further upgraded sensor
capability to a G7 central bank in response
to a standardization requirement
Proposal issued for a covert security
product for a polymer banknote customer
Obtained approval for TruBrandTM materials
on tobacco products sold in China
Highly successful production-scale
testing and consummation of our TruBrandTM
taggants by a large tobacco company
printer in China
New opportunities include G7 and other
central banks
Penetration into the polymer banknote
market through partnerships with
polymer suppliers
Expectation to execute a license and
supply agreement for a covert security
product for polymer banknotes with
a major central bank within the next
two years
The utilization of the Secure Transactions
Group for cloud-based server authentication
of TruBrandTM
The sale of our smartphone
technology TruNoteTM for the
authentication of banknotes
Sales of TruBrandTM materials in 2018
New sales channel for our specialty
phosphor materials to a banknote
security thread manufacturer
Incorporation of phosphors in our
smartphone products
Increased opportunities with
long-standing customers
Progress
Outlook
4
Develop and acquire specialty phosphor
Identify areas for cost savings in both
and taggants for authentication
infrastructure and staff composition
Develop new TruBrandTM taggants
Internal development and licensing
of novel phosphors
Restructure staffing to focus on
specialty materials
Acquired specialty phosphor company
Restructuring of staff to reduce
in January 2016
R&D spend
Increased phosphor sales beyond
US banknotes into Asia and Europe
Consolidated operations upon
the expiration of a property lease
through partners
in mid-2017
Successfully initiated new line of business
Seeking lower cost materials
in consumer products, namely coffee cups
and services or price reductions
from suppliers
Gross margin increases resulting
from in-house manufacturing
The benefits of reduced staffing
and leased space is expected to
be realized in 2018
Spectra Systems Corporation Annual report and accounts 2017 ICS
Expanding its authentication of secure transactions
Our Secure Transactions Group is poised to service potential new markets
for sports gambling which is on the verge of being legalized in several states.
From New York to California, lawmakers in at least 20 states are wagering
that sports gambling could become legal in 2018 and are crafting legislation
to make that happen within their borders.
Increase high-margin
specialty materials sales
Implement
cost reductions
Future development of covert materials
Leverage TruBrandTM smartphone
and sensors will be externally funded
Develop and acquire specialty phosphor
and taggants for authentication
Identify areas for cost savings in both
infrastructure and staff composition
Develop new TruBrandTM taggants
Internal development and licensing
of novel phosphors
Restructure staffing to focus on
specialty materials
Proposal issued for the development
Obtained approval for TruBrandTM materials
and supply of further upgraded sensor
on tobacco products sold in China
Acquired specialty phosphor company
in January 2016
Restructuring of staff to reduce
R&D spend
Increased phosphor sales beyond
US banknotes into Asia and Europe
through partners
Successfully initiated new line of business
in consumer products, namely coffee cups
New sales channel for our specialty
phosphor materials to a banknote
security thread manufacturer
Incorporation of phosphors in our
smartphone products
Increased opportunities with
long-standing customers
Consolidated operations upon
the expiration of a property lease
in mid-2017
Seeking lower cost materials
and services or price reductions
from suppliers
Gross margin increases resulting
from in-house manufacturing
The benefits of reduced staffing
and leased space is expected to
be realized in 2018
Capitalize on
existing suite of
developed covert
material products
Advanced smartphone
authentication
technology
Focus on polymer banknotes
Additional business from
existing customers
technology to create new revenue
streams for both materials as well
as the Secure Transactions Group
Focus on large, billion unit opportunities
capability to a G7 central bank in response
to a standardization requirement
Highly successful production-scale
testing and consummation of our TruBrandTM
Proposal issued for a covert security
taggants by a large tobacco company
product for a polymer banknote customer
printer in China
New opportunities include G7 and other
The utilization of the Secure Transactions
central banks
Group for cloud-based server authentication
Penetration into the polymer banknote
market through partnerships with
polymer suppliers
Expectation to execute a license and
product for polymer banknotes with
a major central bank within the next
two years
of TruBrandTM
The sale of our smartphone
technology TruNoteTM for the
authentication of banknotes
supply agreement for a covert security
Sales of TruBrandTM materials in 2018
1
5
Annual report and accounts 2017 Spectra Systems Corporation Chief Executive Officer’s statement
Through achieving key commercial
milestones, Spectra Systems has delivered
an excellent performance for the 2017
financial year.
Introduction
Through achieving key commercial
milestones, as described in the Review
of operations below, Spectra Systems
has delivered an excellent performance
for the 2017 financial year.
Revenue for the year was US$12,170k
(2016: US$11,122k) due to record phosphor
sales and higher royalties earned. Adjusted
EBITDA (before stock compensation
expense and exceptional items) for
the year increased 83% to US$4,349k
compared to the prior year of US$2,383k.
Having generated cash from operations
of US$4,669k (2016: US$2,805k), cash
at the period end amounted to US$11,181k
(2016: US$8,808k), excluding US$1,099k
of restricted cash and investments
(2016: US$1,092k). This is notwithstanding
US$2,270k paid to shareholders during
June in the form of the Company’s
inaugural dividend of US$0.05 per share.
The Company therefore intends to
declare an annual dividend up 20% at
US$0.06 per share to be paid in June.
The Company will continue to have
sufficient cash resources thereafter
to execute on its growth plans.
Review of operations
Authentication Systems
The Authentication Systems
business, which includes the security
phosphor materials, generated revenue
of US$10,823k (2016: US$9,848k)
and adjusted EBITDA of US$3,794k
(2016: US$1,928k). Authentication Systems
revenues are driven by covert material
sales and royalties through our licensing
agreement with a major banknote supplier
and printer to 18 central banks, including
one G7 central bank, and directly to
another G7 central bank. We are pleased
to report that we continue to sustain a
margin increase from using our in-house
manufacturing facility.
The strong earnings from our
covert materials business has been
complemented with continued strong
sales of high-margin brand authentication
materials and particularly phosphors
related to a central bank’s redesign
of banknotes which was completed
in 2017.
The TruBrand™ authentication business
is performing on track and continues
to have significant prospects in China
bolstered by our highly successful large
scale production test results with a
major tobacco company printer in
China in Q4 of 2017.
Based on our advances in 2017, we expect
to execute a new direct licensing and
supply agreement for a covert security
product for polymer banknotes within
the next two years. We expect that the
translation of this new technology from
a laboratory system to a finalized product
will be funded under a development
agreement with the central bank
customer beginning in late 2018.
Secure Transactions Group
The Secure Transactions Group
performed in line with management
expectations, generating adjusted
EBITDA of US$555k (2016: US$505k) on
revenue of US$1,347k (2016: US$1,274k).
This segment of the business is
producing solid revenue growth as
well as increased earnings. With the
introduction of the 64-bit product
along with our position as the only
supplier with a virtual machine
capability, we are confident we will
continue to attract more customers
from our competitors.
The Secure Transactions Group has won
a new contract with the Maryland Lottery,
3 new licences and has continued to roll
out 64-bit Premier Integrity. The Secure
Transaction Group will complete their
ISO-27001 Certification in 2018 and
continue working with organizations such
as the World Lottery Association (WLA)
and the North American Association of
State and Provincial Lotteries (NASPL).
We are confident that we will see
continued growth of the business in 2018.
6
Spectra Systems Corporation Annual report and accounts 2017 1
The Company’s strategy for increasing
revenue and earnings is focused on brand
authentication and specialty optical
materials for security applications while
maintaining a robust effort to commercialize
our covert security technologies.
Nabil M. Lawandy
Chief Executive Officer
Strategy
The Company’s strategy for increasing
revenue and earnings is focused on
brand authentication and specialty
optical materials for security applications
while maintaining a robust effort
to commercialize our covert
security technologies.
The brand authentication sector
offers significant short-term growth
and some very large opportunities for
smartphone-based technology while
the covert banknote security area
provides long-term, multi-decade
revenues once new contracts are
executed. The banknote industry
continues to have a CAGR of 3.3% and
is expected to reach US$11.2 billion by
2021 (Smithers Pira, 1/2017). This growth
continues in the face of utopian goals
of a cashless society by some central
bank executives and any changes in
this trend will go through a very long
phase of transitions to new substrates,
denomination reductions, and
multifunctional security features before
a decline of any significance takes
place in the industry.
We have developed and introduced an
impressive suite of covert authentication
products which are currently under
consideration by central banks and
potential corporate licensing partners.
These products are primarily targeted
towards polymer banknotes where
growth is beginning to outpace annual
increases in paper banknote production.
Through our close relationship with our
direct G7 customer, we have become a
trusted supplier of technology and have
been asked to bid on several sensor
upgrades, including our own sensors
which are currently in use. We are
confident that this will result in additional
business and underpins our strategy
of growing our business with existing
customers in banknote security.
Licensing agreement and supply agreement
Extending the rights to the underlying technology
Spectra is delighted to announce
that it has executed an exclusive,
worldwide, licensing agreement for
one of its existing products which
is in use by 18 central banks through
an existing licensee, a major supplier
of banknotes worldwide.
The Board anticipates that the
supply of material, which does not
incorporate minimum quantities,
will generate total revenue of
approximately US$1.5 million
– US$2.0 million over the next
five years.
The licensing agreement will
extend the rights to the underlying
technology, which has been in
use since 2003, in perpetuity, and
generate US$11.2 million in royalty
payments over the next five years.
The payments will be settled in
eleven equally spaced payments.
In addition, Spectra also executed a
material supply agreement with the
same licensee to provide them with
covert materials exclusively for a
period of ten years at reduced rates
relative to the current agreement.
It is estimated, however, that
the combined license and supplied
material sales will generate a
contribution per annum from this
product through 2023 which is
approximately 2.7 times that of the
current agreement, based on the
minimum purchase requirements
in that agreement and experienced
in certain recent years.
7
Annual report and accounts 2017 Spectra Systems Corporation Chief Executive Officer’s statement continued
Strategy continued
Mirroring the shift towards secure
materials outside of banknotes, we
began a restructuring of staff to allow
us to market our optical materials in
related areas such as process control
and consumer products.
The Secure Transactions Group
continues to innovate within the
lottery ICS industry, reducing cost
and increasing efficiency with the
introduction of Virtualized Machines.
The use of VM, we expect will allow us
to win contracts from our competitors
by offering more value to the customer
and has become an integral part
of the strategy of the group.
Prospects
We are targeting five specific
opportunities, two of which are
relatively near-term and three
of which are somewhat longer-term.
The important, near term
opportunities are:
1) The initial small-scale sales
of TruBrandTM materials along
with cloud-based authentication
services in 2018.
2) The funded commercialization
of a polymer banknote technology
by a major central bank.
The longer-term (two-four years)
opportunities are:
3) A licensing and supply agreement for
polymer-based technology developed
through external funding with a major
central bank.
4) The development and supply
of further upgraded sensor capability
to a G7 central bank in response to
a standardization requirement.
5) The adoption of our Secure
Transactions Group products for
sports gambling which is on the
verge of being legalized in several
states. From New York to California,
lawmakers in at least 20 states are
wagering that sports gambling could
become legal in 2018 and are crafting
legislation to make that happen
within their borders.
In addition to these specific and defined
targets, we continue to pursue banknote
tenders with major central banks using
other covert security features we have
developed as well as our TruNote™
technology. Furthermore, we have a
second polymer-based technology
which we believe may be of great value
through a possible partnership with a
polymer supplier. This is an approach
we are exploring before reverting to
the more traditional approach we have
taken in the past where we license
technology to a major banknote printer
or supplier.
We are pleased that we are
able to supplement our sustained
and growing profitability with a number
of near-term and longer-term prospects
of significant scale. We are particularly
delighted that the authentication
business outside of banknotes is
growing ahead of expectations,
which provides recurring revenue to
supplement our long-term banknote
business with its characteristically
extended sales cycles and delays.
Regulatory approval for TruBrand™ materials in China
Spectra Systems is delighted to report that approval
for the use of Spectra’s TruBrand™ materials on tobacco
products sold in China has been granted.
Further updates will be provided,
as appropriate.
Dr. Nabil Lawandy, CEO of Spectra
Systems stated: “We believe the
approval by the CTSRC is a critical
achievement in the commercialization
process of our TruBrandTM technology
for the large tobacco industry in China.
The opportunity for the Company is
significant with over 200 billion
cigarette packages being sold
annually in China.”
The approval was issued by
The Tobacco Standardization
Research Center (CTSRC) in Beijing
to one of Spectra System’s potential
customers. This potential customer
had applied for the approval, and
remains interested in using TruBrandTM
materials on their products.
This approval of Spectra System’s
TruBrandTM materials should open
the way for production testing
and commercialization of this
breakthrough smartphone technology.
Assuming this approval is granted to
other applicants, which the Directors
believe is highly likely, then other
manufacturers of tobacco products
in the People’s Republic of China will
also be able to test and potentially
commercialize the technology.
8
Spectra Systems Corporation Annual report and accounts 2017 We believe that we have a number
of transformative opportunities
ahead in several aspects of our
business that will drive near and
long-term earnings growth for the
Company and its shareholders.
We believe that we have a number
of transformative opportunities ahead
in several aspects of our business that
will drive near and long-term earnings
growth for the Company and
its shareholders.
With the Company having a fourth year
of sustainable profits and having sufficient
resources to execute on its growth plans
with its existing cash reserves, the Board
is delighted to continue paying dividends.
Its dividend policy takes account of the
Group’s profitability, underlying growth,
and the maintenance of sufficient cash
reserves. The Board therefore intends to
pay an annual dividend of US$0.06 per
share on or about June 29, 2018 to
shareholders of record as of June 8, 2018.
Nabil M. Lawandy
Chief Executive Officer
March 19, 2018
New opportunity in consumer products
Spectra Systems is delighted to announce a five-year
agreement with LMI Packaging Solutions of Pleasant Prairie,
Wisconsin to incorporate Spectra Systems authentication
technology into LMI produced coffee K-cup lids.
hardware with the associated
consumables. Working with LMI has
been one of the smoothest product
developments we have had and we
are confident in their ability to attract
more customers to their lids that use
our materials.”
“We are confident that over time this
new line will grow into a stable source
of revenue and profit. The total global
K-Cup market in which LMI is
participating is already over
10 billion units per year.”
Spectra System’s coating
formulation will allow coffee
suppliers producing their K-cup
lids at LMI Packaging Solutions to
have complete functionality in the
Keurig K-cup system which uses
internal sensors that allow it to only
work with specific material signatures
printed on the K-cups. Under the
agreement, Spectra Systems must
supply its technology for K-Cups
exclusively to LMI Packaging
Solutions for the first 18 months.
Dr. Nabil Lawandy, CEO of Spectra
Systems, stated: “This agreement
with LMI has validated our ability
to provide security products in the
consumer products market where an
increasing number of manufacturers
are using sensors to lock their
9
Annual report and accounts 2017 Spectra Systems Corporation1 Board of Directors
Our Board of Directors has
a collective responsibility to
shareholders for the sustainable
long‑term success of the business.
BJ Penn
Non-executive Chairman
Donald Stanford
Non-executive Director
Martin Jaskel
Non-executive Director
Mr. Stanford, who was until 2001
the Chief Technical Officer of GTECH
Corporation, is an Adjunct Professor
of Computer Science and Engineering
at Brown University and is an instructor
in the Program in Innovation, Management
and Entrepreneurship (PRIME). He holds
a BA in International Relations and an MS in
Computer Science and Applied Mathematics,
both from Brown University. Over 30 years, he
has held every technical leadership position,
including Vice President of Advanced
Development and Chief Technology Officer.
Mr. Stanford serves on several boards
including Times Squared Academy Charter
School and the Business Innovation Factory.
Mr. Stanford is a member of the
RI Science and Technology Advisory
Council. He serves on the Brown advisory
councils to the President and the School
of Engineering. In 1999 Mr. Stanford received
the Black Engineer of the Year Award for
Professional Achievement. In 1999 he
also received the Honorable Thurgood
Marshall Award for Community Service
from the NAACP. In 2002 he received the
Brown Graduate School’s Distinguished
Graduate Award and the RI Professional
Engineer’s Award for Community Service.
Mr. Penn was Acting Secretary of the
US Navy from March to May 2009, having
previously been Assistant Secretary of the
US Navy (Installations and Environment) from
March 2005. He was also Director, Industrial
Base Assessments from October 2001 to
March 2005, with responsibility for the
overall health of the US defense industrial
base. He commenced his career as a
Naval Aviator, having received his BS from
Purdue University, West Lafayette, and his
MS from the George Washington University,
Washington, DC. Mr. Penn has been a member
of the Board since June 2010 and became
Chairman of the Board on June 7, 2011.
Nabil Lawandy
President and
Chief Executive Officer
Dr. Lawandy is the founder, President
and Chief Executive Officer of the Company.
From 1981 to 1999, Dr. Lawandy was
a tenured full professor of Engineering
and Physics at Brown University. He holds
a BA in Physics, and an MSc and PhD in
Chemistry, both from the Johns Hopkins
University. He has authored over 170 reviewed
scientific papers and is an inventor on over
50 US and 25 foreign issued patents. He has
also received a Presidential Young Investigator
Award, an Alfred P. Sloan Fellowship,
a Rolex Award for Enterprise and a
Samuel Slater Award for Innovation.
Mr. Jaskel has over 40 years of involvement
in the financial services industry. He began
in the United Kingdom government bond
market as a broker with leading firms,
latterly as a Partner in W Greenwell & Co.
In 1986, as an element of the deregulation
of the UK markets, W Greenwell was sold
to Midland Bank and became the leading
Gilt‑Edged Market Maker, of which
Mr. Jaskel was a Director. In 1988 he was
appointed Director of Global Sales and
Marketing of Midland Montagu Treasury
(the treasury division of Midland Bank)
after chairing a committee to redesign the
distribution of treasury products. In 1990
he was appointed Director of Global Sales
at NatWest Treasury and rebuilt the
franchise global distribution of treasury
and capital markets products.
In 1994 he was promoted to Managing
Director of Global Trade and Banking
Services. He sat on the Advisory Board
of ECGD, the UK export import bank, was
responsible for several years for signing
off all the UK exposure to BAE and Airbus
and sat on several government and Bank
of England advisory boards. In 1997 he left
NatWest and founded a financial services
consultancy, which included a consultancy
at KPMG Corporate Finance and the
corporate FX division of Travelex plc, and
an interim appointment as the Managing
Director of a private real estate company
with a £500 million portfolio of commercial
and residential property. In 2005 he joined
European American Capital Limited, an
FCA‑authorized and regulated specialized
advisory bank, as a Director. He has wide
experience as a Non‑executive Director of
both publicly quoted and private companies.
Key
Audit Committee
Compensation Committee
Government Security Committee
Nominating Committee
10
Spectra Systems Corporation Annual report and accounts 2017
Senior management
Our senior management team
highlights our strong internal talent
base, providing clear direction and
support for all areas of the business.
Brian McLain
Chief Financial Officer
and Company Secretary
James Cherry
Director of
Authentication Systems
Scott Tillotson
Director of Secure
Transactions
Mr. Cherry serves as Director of
Authentication Systems. He joined the
Company in 2002 from Auspex Systems,
an enterprise network data storage system
business, where he had been involved in
marketing and product management for
seven years. Prior to that, he had worked for
five years at DuPont in product management.
Mr. Tillotson serves as Director
of Secure Transactions Group. He has
held a variety of positions with Spectra
for ten years and GTECH Corporation, a
leader in the lottery industry, for nine years,
in product marketing and management.
Prior to that, he worked for the
IBM Corporation as an Account Executive
and Systems Engineer. Mr. Tillotson holds
a BSEE from Purdue University.
Mr. McLain has been Spectra’s
Chief Financial Officer since January 2017.
Before joining Spectra, he served as the
Corporate Controller for OMNIlife Science, Inc.
Prior to OMNIlife Science, he progressed
from the role of Corporate Controller to
Vice President, Finance & Business Solutions
at SeraCare Life Sciences, Inc., which was
quoted on NASDAQ prior to being bought
out in 2012. Previously, he served in various
finance roles at International Power,
a UK‑owned power producer, and
Excelergy Corporation, a venture‑backed
software business. He started his career
at Arthur Andersen. Mr. McLain holds a
BS from Boston College and is a licensed
Certified Public Accountant.
William Goltsos
Vice President of Engineering
Andrei Smuk
Director of Research
and Development
Dr. Goltsos was appointed
Vice President of Engineering in April 2000.
From September 1996 to April 2000, he
served as Senior Systems Engineer. Prior to
that, from 1992 to 1996, he served as a staff
member of the MIT/Lincoln Laboratory’s
Optical Communications Group. Dr. Goltsos
holds a BS in Physics from Rensselaer
Polytechnic Institute and an MS and PhD
in Physics from Brown University.
Dr. Smuk, who joined the Company
in 2000, was appointed Director
of Research and Development in 2006.
He is responsible for the development
of advanced materials and innovative sensor
systems. He received a PhD in Physics from
Brown University in 2000 and an MS in
Applied Physics from the Moscow Institute
of Physics and Technology in 1994.
11
Annual report and accounts 2017 Spectra Systems Corporation2
Directors’ report
for the year ended December 31, 2017
The Directors present their report and the audited consolidated financial statements for the year ended December 31, 2017.
Domicile
Spectra Systems Corporation is a C corporation and is registered and domiciled in the United States of America.
Principal activity
The principal activity of the Company is to invent, develop and sell integrated optical systems that provide customers with
increased efficiency, security tracking and product life. The integrated systems combine consumables and engineered optical
materials with software and hardware for use in applications. The Company also provides software tools to the lottery and gaming
industries for fraud, money laundering and match fixing detection, as well as statistical analysis.
Results and dividends
The Company’s statements of income and other comprehensive income are set out on page 18 and show the results for
each year.
There are nominal federal and state income tax liabilities on the respective income tax returns due to timing differences arising
between items of income and expense recorded on the books and those reported on the tax returns. Additionally, the Company
has approximately US$23 million in federal and US$150,000 in state net operating loss carryforwards to offset future income
reported on the respective tax returns.
The Directors intend to pay a dividend of US$0.06 per share on or about June 29, 2018 to shareholders of record as
of June 8, 2018.
Review of business and future developments
A review of the operations of the Group is contained in the Spectra at a glance review on page 2.
Principal risks and uncertainties and financial risk management
Complex products
Certain of the products produced by the Company are highly complex and are designed to be used in complex systems.
Failure to correct errors or other problems identified after deployment could result in events that may have a negative
effect on the Company’s business and financial condition.
The Company’s markets may become impacted by technological change
Markets for the Company’s products may become characterized by rapidly changing technology, evolving industry standards
and increasingly sophisticated customer requirements. The introduction of products embodying new technology and the
emergence of new industry standards could render the Company’s existing products obsolete and unmarketable and may
exert pricing pressure on existing products. If the Company could not then develop products that remain competitive in
terms of technology and price and that meet customer needs, this could have a negative impact on the business.
Expiry of patents
All patents have a limited duration of enforceability. US patents generally have a duration of 20 years from the filing date.
Once a patent expires, the invention disclosed in the patent may be freely used by the public without accounting to the
patent owner, as long as there are no other unexpired patents that embrace an aspect of the invention. There is no certainty
that any improvement, new use or new formulation will be patented to extend the protection of the underlying invention or
provide additional coverage to adequately protect the invention. As a result, the public may have the right to freely use the
invention described in and previously protected by an expired patent.
Dependence on key personnel
The success of the Company’s revenues are dependent on a limited number of employees, in particular the Chief Executive
Officer and other managers with technological and development input. The Company has endeavored to ensure that its key
employees are incentivized but cannot guarantee the retention of these staff.
Forward-looking statements
All statements, other than statements of historical fact, contained in this document constitute “forward‑looking statements”.
In some cases, forward‑looking statements can be identified by terms such as “may”, “intend”, “might”, “will”, “should”, “could”,
“would”, “believe”, or the negative of these terms and similar expressions. Such forward‑looking statements are based on
assumptions and estimates, and involve risks, uncertainties and other factors which may cause the actual results, financial
condition, performance or achievements of the Company, or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward‑looking statements. New factors may emerge from time to
time that could cause the Company’s business not to develop as it expects and it is not possible for the Company to predict
all such factors. Given these uncertainties, investors are cautioned not to place any undue reliance on such forward‑looking
statements. Except as required by law, the Company disclaims any obligation to update any such forward‑looking statements
in this document to reflect future events or developments.
12
Spectra Systems Corporation Annual report and accounts 2017 Key performance indicators (in thousands)
– Revenue of US$12,170k (2016: US$11,122k).
– Adjusted EBITDA of US$4,349k (2016: US$2,383k).
– Adjusted PBTA of US$4,010k (2016: US$1,999k).
– Basic earnings per share, in cents, of US$0.07 (2016: US$0.03).
Post-reporting date events
During January 2018, the Company executed an exclusive, worldwide, licensing agreement for one of its existing products
which is currently in use by 18 central banks through an existing licensee, a major supplier of banknotes worldwide. The licensing
agreement will extend the rights to the underlying technology, which has been in use since 2003, in perpetuity, and generate
US$11.2 million in royalty payments over the next five years. The payments will be settled in eleven equally spaced payments.
In addition, the Company also executed a Material Supply Agreement with the same licensee to continue to provide them with
covert materials, exclusively, for a period of ten years at reduced rates relative to the current agreement.
Financial instruments
Details of the use of financial instruments by the Company are contained in note B of the financial statements.
Directors’ responsibilities
The Directors are responsible for preparing the Directors’ report and the financial statements on the basis of preparation
set out in note A of the financial statements and in accordance with United States Generally Accepted Accounting Principles
(US GAAP). The Directors of the Company are responsible for the document in which the financial information is included.
In preparing these financial statements, the Directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgments and accounting estimates that are reasonable and prudent; and
– state whether they have been prepared in accordance with US GAAP, subject to any material departures disclosed
and explained in the financial statements.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions, disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure
that the financial statements comply with all legal requirements. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Directors’ interests
The Directors’ beneficial interests in the common stock of the Company were as follows:
Ordinary shares
N. Lawandy
M. Jaskel
December 31,
2017
2016
1,883,540
1,883,540
37,963
9,960
1,921,503
1,893,500
Substantial shareholdings
The following shareholders held 3% or more of the issued common stock of the Company at December 31, 2017:
Mercantile Investment Company Ltd.
O. Salam
N. Slater
Herald Investment Management Ltd.
N. Lawandy
H. Heye
Ordinary
shares
6,800,000
3,594,464
3,210,000
2,929,300
1,883,540
1,813,850
20,231,154
% issued
14.97
7.91
7.07
6.45
4.15
3.99
44.54
13
Annual report and accounts 2017 Spectra Systems Corporation2 Directors’ report continued
for the year ended December 31, 2017
Directors’ compensation
The following table details the Directors’ earned compensation for the year ended December 31, 2017:
Executive Directors
N. Lawandy
Non-executive Directors
B. Penn
M. Jaskel
D. Stanford
Total
Salary
and bonus
Benefits
Board fees
Total
compensation
$
575,000 $
34,386
$
— $
609,386
—
—
—
—
—
—
18,000
18,000
18,000
18,000
18,000
18,000
$
575,000 $
34,386
$
54,000 $
663,386
Directors’ share options
At December 31, 2017, Directors had options or warrants to purchase ordinary shares under the Company’s stock option plan
as follows:
N. Lawandy
B. Penn
M. Jaskel
D. Stanford
Options held at
December 31,
2017
Weighted
average
exercise price
Options vested
at December 31,
2017
4,030,292
$
220,000
160,000
220,000
4,630,292
$
0.56
0.50
0.46
0.50
0.55
3,403,271
186,666
126,666
186,666
3,903,269
Corporate governance
At both December 31, 2017 and the date of this report, the Board comprised one Executive Director, Nabil Lawandy,
and three independent Non‑executive Directors, BJ Penn, as Chairman, Martin Jaskel and Donald Stanford. The Board usually
meets at least every three months to closely monitor the progress of the Company towards the achievement of budgets,
targets and strategic objectives.
The Board also operates four Committees, the Audit Committee, the Compensation Committee, the Nominating Committee
and the Government Security Committee.
The Audit Committee comprises Martin Jaskel as Chairman, Nabil Lawandy and Donald Stanford. It has primary responsibility
for monitoring the quality of internal controls and ensuring that the financial performance of the Company is properly measured
and reported on. It will receive and review reports from the Company’s management and auditor relating to the interim and
annual accounts and the accounting and internal control systems in use throughout the Company. The Audit Committee intends
to meet no less than three times each financial year and will have unrestricted access to the Company’s auditor.
The Compensation Committee comprises Donald Stanford as Chairman, Martin Jaskel and BJ Penn. It reviews the performance
of the Executive Directors and makes recommendations to the Board on matters relating to remuneration and terms of employment.
The Committee also makes recommendations to the Board on proposals for the granting of share options and other equity
incentives pursuant to any share options scheme or equity incentive scheme in operation from time to time.
The Nominating Committee comprises Martin Jaskel, as Chairman, BJ Penn and Donald Stanford. The Committee seeks
and nominates qualified candidates for election or appointment to Spectra’s Board of Directors.
The Government Security Committee comprises BJ Penn, as Chairman, and Nabil Lawandy. It is responsible for ensuring
the implementation within the Company of all procedures, organizational matters and other aspects pertaining to the security
and safeguarding of information, including the exercise of appropriate oversight and the monitoring of operations to ensure
that protective measures are effectively maintained and implemented.
The Board intends to comply with Rule 21 of the AIM Rules relating to Directors’ dealings and will also take all reasonable
steps to ensure compliance by the Company’s applicable employees. The Company has adopted a share dealing code for
this purpose on substantially the same terms as the Model Code.
14
Spectra Systems Corporation Annual report and accounts 2017 Website publication
The Directors are responsible for ensuring the annual report and the financial statements are made available on a website.
Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing
the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance
and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the
ongoing integrity of the financial statements contained therein.
Auditor
All of the current Directors have made themselves aware of any information needed by the Company’s auditor for the
purposes of its audit and have established that the auditor is aware of that information. The Directors are not aware of any
relevant information of which the auditor is unaware.
Miller Wachman LLP have expressed their willingness to continue as the Company’s auditor and a resolution to re‑appoint
Miller Wachman LLP will be proposed at the Annual General Meeting.
By order of the Board
Brian McLain
Company Secretary
April 3, 2018
15
Annual report and accounts 2017 Spectra Systems Corporation2 Independent auditor’s report
To the Board of Directors and Stockholders of Spectra Systems Corporation
We have audited the accompanying financial statements of Spectra Systems Corporation, which comprise the balance
sheets as of December 31, 2017 and 2016, and the related statements of income and other comprehensive income,
stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with
accounting principles generally accepted in the United States of America; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of Spectra Systems Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows
for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Miller Wachman LLP
Boston, Massachusetts
March 28, 2018
16
Spectra Systems Corporation Annual report and accounts 2017 Balance sheets
December 31, 2017 and 2016
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of US$48,000
and US$12,500 in 2017 and 2016, respectively
Other receivables
Inventory
Prepaid expenses
Total current assets
Property, plant and equipment, net
Other assets
Intangible assets, net
Restricted cash and investments
Deferred tax assets
Other assets
Total other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities
Accounts payable
Accrued expenses and other liabilities
Taxes payable
Deferred revenue
Total current liabilities
Non-current liabilities
Deferred revenue
Total non-current liabilities
Total liabilities
Commitments and contingencies (note J)
Stockholders’ equity
Common stock, US$0.01 par value, 125,000,000 shares authorized at December 31, 2017
and 2016; 45,434,754 and 45,251,370 shares issued and outstanding at December 31, 2017
and 2016, respectively
Additional paid-in capital – common stock
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
2017
2016
$
11,180,578
$
8,807,868
1,244,507
2,538,230
180,794
167,792
3,754,610
2,914,671
115,887
103,981
16,476,376
14,532,542
1,794,460
2,560,970
6,966,367
1,099,021
1,225,000
151,391
7,304,113
1,091,732
989,000
145,727
9,441,779
9,530,572
$
27,712,615
$
26,624,084
$
200,242
$
401,603
1,520,736
1,437,346
8,178
—
1,074,184
1,260,319
2,803,340
3,099,268
457,786
457,786
255,886
255,886
3,261,126
3,355,154
454,348
452,514
55,223,989
55,061,067
(105,254)
(113,313)
(31,121,594)
(32,131,338)
24,451,489
23,268,930
Total liabilities and stockholders’ equity
$
27,712,615
$
26,624,084
The accompanying notes are an integral part of these financial statements.
17
Annual report and accounts 2017 Spectra Systems Corporation3
Statements of income and other comprehensive income
for the years ended December 31, 2017 and 2016
2017
2016
$
9,388,129 $
9,036,814
1,629,412
1,152,231
1,620,503
464,302
12,169,772
11,121,619
3,514,245
3,523,360
8,655,527
7,598,259
1,765,149
3,293,262
566,544
2,347,591
3,421,310
737,273
5,624,955
6,506,174
3,030,572
1,092,085
60,480
—
1,680
62,160
52,432
351
(5,815)
46,968
3,092,732
1,139,053
187,350
—
$
3,280,082 $
1,139,053
$
$
0.07 $
0.07
$
0.03
0.03
45,369,084
45,251,370
47,881,783
45,297,370
$
9,739
$
(32,837)
(1,680)
8,059
5,815
(27,022)
$
3,288,141 $
1,112,031
Revenues
Product
Service
Royalty
Total revenues
Cost of sales
Gross profit
Operating expenses
Research and development
General and administrative
Sales and marketing
Total operating expenses
Income from operations
Other income/(expense)
Interest income
Other income, net
Foreign currency loss
Total other income, net
Income before provision for income taxes
Income tax benefit
Net income
Earnings per share
Basic
Diluted
Weighted average number of common shares
Basic
Diluted
Other comprehensive income/(loss)
Unrealized income/(loss) on currency exchange
Reclassification for realized loss in net income
Total other comprehensive income/(loss)
Comprehensive income
The accompanying notes are an integral part of these financial statements.
18
Spectra Systems Corporation Annual report and accounts 2017 Statements of stockholders’ equity
for the years ended December 31, 2017 and 2016
Common stock
Shares
Amount
Additional
paid-in capital
Accumulated
deficit
Other
comprehensive
loss
Total
stockholders’
equity
Balance at December 31, 2015
45,251,370
$
452,514
$ 54,936,776
$ (33,270,391) $
(86,291) $ 22,032,608
Compensation cost related to
amortization of stock options
Reclassification for realized
loss in net income
Unrealized loss on
currency exchange
Net income
—
—
—
—
—
—
—
—
124,291
—
—
—
—
—
—
—
124,291
5,815
5,815
(32,837)
(32,837)
1,139,053
—
1,139,053
Balance at December 31, 2016
45,251,370
$
452,514
$ 55,061,067
$ (32,131,338) $
(113,313) $ 23,268,930
Compensation cost related to
amortization of stock options
Reclassification for realized
loss in net income
Unrealized loss on
currency exchange
—
—
—
—
—
—
122,956
—
—
Exercise of stock options
183,384
1,834
39,966
—
—
—
—
Dividends paid
Net income
—
—
—
—
—
—
(2,270,338)
3,280,082
—
122,956
(1,680)
(1,680)
9,739
—
—
—
9,739
41,800
(2,270,338)
3,280,082
Balance at December 31, 2017
45,434,754
$
454,348
$ 55,223,989
$ (31,121,594) $
(105,254) $ 24,451,489
The accompanying notes are an integral part of these financial statements.
19
Annual report and accounts 2017 Spectra Systems Corporation3 Statements of cash flows
for the years ended December 31, 2017 and 2016
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2017
2016
$
3,280,082
$
1,139,053
Depreciation and amortization
Stock-based compensation expense
Deferred taxes
Allowance for doubtful accounts
Inventory obsolescence
Loss on sale of property and equipment
Changes in operating assets and liabilities:
Accounts receivable
Other receivable
Inventory
Prepaid expenses
Other assets
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities
Restricted cash and investments
Payment of patent and trademark costs
Payment of software costs
Asset acquisitions
Cash proceeds on sale of property and equipment
Purchases of property, plant, and equipment
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Proceeds from exercise of stock options
Net cash used in financing activities
Effect of exchange rate on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
1,103,388
1,097,673
122,956
(236,000)
35,500
92,426
32,420
124,291
—
22,177
—
—
1,258,223
1,638,365
(12,106)
(932,365)
(9,873)
3,156
(115,442)
143,013
21,455
(2,656)
(170,319)
(1,126,920)
89,042
12,965
(128,068)
(8,306)
4,669,495
2,804,635
(7,289)
(395,711)
(8,575)
(18,174)
(390,679)
(123,675)
—
(3,118,489)
405,400
(71,276)
—
(129,646)
(77,451)
(3,780,663)
(2,270,338)
41,800
(2,228,538)
—
—
—
9,204
(24,591)
2,372,710
8,807,868
(1,000,619)
9,808,487
Cash and cash equivalents, end of the year
$
11,180,578
$
8,807,868
Supplemental disclosures of cash flow information
Income taxes paid
Non-cash investing activities
Acquisition of patents through accounts payable
The accompanying notes are an integral part of these financial statements.
$
$
41,331
$
—
33,008
$
64,428
20
Spectra Systems Corporation Annual report and accounts 2017
Notes to the financial information
for the years ended December 31, 2017 and 2016
Note A – Corporate information
Spectra Systems Corporation (the “Company”) develops and sells integrated optical systems that provide customers with
increased efficiency, security tracking and product life. The integrated systems combine consumables and engineered optical
materials with software and hardware for use in applications. The Company develops and sells its integrated solutions across
a spectrum of markets, including currency manufacturing and cleaning, branded products, industrial logistics and other highly
sensitive documents. The Company also provides software tools to the lottery and gaming industries for fraud, money laundering
and match fixing detection, as well as statistical analysis.
The Company was incorporated on July 3, 1996 in Delaware as Spectra Acquisition Corp. On August 26, 1996, the Company
purchased substantially all of the assets of SSC Science Corporation and changed its name to Spectra Science Corporation.
The assets were purchased for US$1,654,000 in cash plus common stock warrants. The acquisition was accounted for using
the purchase method of accounting.
On June 8, 2001, the Company changed its name to Spectra Systems Corporation.
On July, 25 2011, the Company raised US$20,241,179, net of offering costs, on the London Stock Exchange in a placing
of 18,592,320 common shares at a placing price of £0.753 per new common share, representing 41.09% of the enlarged
common share capital of the Company. As a result of the offering, anti-dilution provisions found in the Company’s
Amended and Restated Certificate of Incorporation converted all of the issued and outstanding preferred shares into
17,185,052 common shares, giving 26,659,050 common shares in issue at the time of the placing.
On June 6, 2012, the Company acquired all of the assets of ESI Integrity, Inc., including its proprietary source codes, multi-year
contracts, long-standing customer relationships and assumed liabilities. US$1,425,000 was paid in consideration for the assets.
On September 14, 2012, the Company acquired certain assets of Lapis Software Associates, including its proprietary source
codes, multi-year and long-standing customer relationships, and assumed liabilities. US$726,000 was paid in consideration
for the assets.
On February 28, 2014, the Company acquired certain assets of Inksure Technologies, Inc., including its long-standing customer
relationships and authentication technology. US$1,356,000 was paid in consideration for the assets.
On September 30, 2015, the Company acquired certain assets of Solaris Nanosciences, Inc. (Solaris), including technology
and customer relationships in exchange for US$213,917 in cash. The Company also recorded US$184,000 in contingent
payments based on a royalty payment arrangement for anticipated continuing business.
On January 28, 2016, the Company acquired certain specialty phosphor assets including technology and customer
relationships. The total consideration amounted to US$3,118,489 (See note M).
Note B – Significant accounting policies
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America (US GAAP) requires management to make estimates and judgments that affect the amounts reported in the
financial statements and accompanying notes. The accounting estimates that require management’s most difficult and
subjective judgments include the assessment of recoverability of property, plant, and equipment; the valuation of inventory;
intangible assets; stock-based compensation and the recognition and measurement of income tax assets and liabilities.
The actual results may differ materially from management’s estimates.
Cash and cash equivalents
The Company considers highly liquid investment purchases with a maturity of 90 days or less at the date of acquisition to be
cash equivalents.
Restricted cash and investments
Restricted cash and investments represents a certificate of deposit held as collateral for certain performance requirements
in accordance with terms of a services contract. As of both December 31, 2017 and 2016, the agreement required that
US$500,000 be maintained as collateral. The collateral will be released as the Company meets contractual milestones.
Restricted cash and investments of US$1,099,021 and US$1,091,732 as of December 31, 2017 and 2016, respectively, are
certificates of deposit whose maturity exceeded 90 days at the date of acquisition, of which US$500,000 is restricted.
21
Annual report and accounts 2017 Spectra Systems Corporation3 Note B – Significant accounting policies continued
Significant concentrations
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash
and cash equivalents and trade accounts receivable. The Company’s cash management policies restrict investments to
low-risk highly liquid securities, and the Company restricts its transactions to financial institutions with good credit standing.
The Company has cash and investments, including restricted, on deposit with financial institutions which are insured by either
the Federal Deposit Insurance Corporation up to US$250,000 per institution or the Canadian Deposit Insurance Corporation
up to 100,000 Canadian Dollars per institution. The Company also maintains cash on hand which is not subject to insurance.
As of December 31, 2017, the amount of cash and investments, including restricted, not insured was US$11,700,099.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the concentration of business with
government entities. The Company’s management attempts to minimize credit risk on its accounts receivable by monitoring
credit exposure on a regular basis.
The following table summarizes the number of customers that individually comprise greater than 10% of total accounts
receivable and their aggregate percentage of the Company’s total accounts receivable as of:
Number of significant customers
Percentage of total receivables
December 31,
2017
2
64%
The following table summarizes the number of customers that individually comprise greater than 10% of total revenues
and their aggregate percentage of the Company’s total revenues for the years ended:
Number of significant customers
Percentage of total revenue
The following table summarizes the geographic concentration of revenue for the years ended:
December 31,
2017
3
64%
2016
3
73%
2016
3
64%
United States of America
Europe
Rest of World
December 31,
2017
2016
$
8,033,065 $
7,951,227
3,044,916
1,091,791
2,165,437
1,004,955
$
12,169,772 $
11,121,619
Accounts receivable
Accounts receivable are stated at the amount management expects to collect from outstanding customer accounts.
Management provides for uncollectible accounts through a provision for bad debt expense. At December 31, 2017 and 2016,
the Company had a US$48,000 and a US$12,500 allowance for doubtful accounts, respectively.
22
Spectra Systems Corporation Annual report and accounts 2017Notes to the financial information continuedfor the years ended December 31, 2017 and 2016 Note B – Significant accounting policies continued
Fair value of financial instruments
As of both December 31, 2017 and 2016, the carrying amounts of the Company’s financial instruments, which include cash
and cash equivalents, accounts receivable and accounts payable, are carried in the financial statements at amounts that
approximate their fair market values due to their short-term nature.
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which
prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon
the lowest level of input that is available and significant to the fair value measurement:
Level 1
Level 2
–
–
Quoted prices in active markets for identical assets or liabilities.
Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices
for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
–
Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market
participants would use in pricing the asset or liability.
As of December 31, 2017 and 2016, the Company has certificates of deposit of US$1,099,021 and US$1,091,732, respectively,
which is included in restricted cash and investments. The Company considers this certificate of deposit as a Level 2 investment.
Foreign currency translation
The functional currency of the Company’s foreign operations is the applicable local currency, the Canadian Dollar. The functional
currency is translated into US Dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet
date and for revenue and expense accounts using an average exchange rate in effect during the applicable period. The translation
adjustments are deferred as a separate component of stockholders’ equity in accumulated other comprehensive loss.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company
regularly reviews inventory quantities on hand and records a provision to write down excess and obsolete inventory to its
estimated net realizable value if less than cost.
Intangible assets
Goodwill represents the excess of purchase price over the fair value of the net assets acquired. Goodwill is not amortized,
but is subject to at least an annual assessment for impairment or whenever events or circumstances indicate that it might
be impaired.
Other intangible assets consist of patents, trademarks and various intangible assets identified as part of a business combination
such as contracts, customer relationships and technology. Patents and trademarks are recorded at cost. For intangible assets
identified as part of a business combination, values are assigned using various valuation techniques, including the present value
of expected future cash flows. Intangible assets are amortized using the straight-line method over their estimated useful lives
ranging from seven to 15 years. The Company evaluates the possible impairment of its intangible assets annually or whenever
events or circumstances indicate the carrying value of the assets may not be recoverable.
Property and equipment
Property and equipment is stated on the basis of purchase price. Depreciation is calculated using the straight-line method
over the following estimated useful lives:
Laboratory equipment
3–7 years
Computer and office equipment
3–5 years
Furniture and fixtures
7 years
Leasehold improvements
Shorter of lease term or estimated useful life
Software
3–5 years
Manufacturing equipment
5–7 years
Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the assets
and related allowances for depreciation and amortization are eliminated from accounts and any resulting gain or loss is
reflected in net income.
23
Annual report and accounts 2017 Spectra Systems Corporation33
Note B – Significant accounting policies continued
Investment in affiliates
The Company accounts for investments in affiliates under the cost method of accounting if the Company owns less than 20%
of the affiliates’ outstanding capital. As of December 31, 2017, the Company held a 19% ownership in an affiliate (SpectraMed),
and a 10% ownership in an affiliate (Solaris). These affiliates have had significant losses in prior years and the Company had
previously reduced its investments in these affiliates to US$nil.
Accounting for stock-based compensation
In accounting for the Employee Stock Option Plan, the Company uses the Black-Scholes option pricing model to calculate
compensation costs associated with options granted to employees. Total compensation costs are recorded over the option
vesting period, generally three years using the straight-line attribution method.
Revenue recognition
Product revenue includes sales of pigments and security taggants, delivery of prototypes and contracts with multiple elements
including nonrecurring engineering and follow-on manufacturing. Service revenue includes research and development services
provided for a fixed price or provided for a specific period.
Revenues related to sales of pigments and security taggants and research and development services provided for a specific
period are generally recognized when products are shipped or services are provided, the risk of loss has passed to the customer,
the sales price is fixed or determinable and collectability is reasonably assured.
Revenue from multiple element arrangements is deferred until all elements of the contract are delivered unless all of the following
criteria have been met: (1) the product or service has been delivered; (2) the fee for the delivered element is not subject to forfeiture,
refund or concession based on performance or delivery of the undelivered element; and (3) the fair value of the delivered element
is determined based upon the price charged by the Company or the price charged by competitors when similar services or products
are sold separately, in which case the revenues for each element will be recognized independently in accordance with the
Company’s policy.
The Company enters into arrangements that can include various combinations of software, services and hardware. Where elements
are delivered over different periods of time, and when allowed under US GAAP, revenue is allocated to the respective elements
based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered.
Revenue from fixed-price development contracts is recognized on the percentage-of-completion method, measured by the
percentage of effort incurred to date to estimated total effort for each contract. That method is used because management
considers total effort to be the best available measure of progress on the contracts. Because of inherent uncertainties in
estimating effort, it is at least reasonably possible that the estimates used will change within the near term.
Royalties are recognized when they are earned based on sales or use of technologies by third parties except where future
income is not anticipated to cover non-refundable advances received, when the excess royalty is taken to income.
Research and development
Internal research and development costs are expensed as incurred. Certain third party research and development costs are
capitalized in connection with contracted work. These costs are expensed as certain milestones are achieved. Overhead, general
and administrative and training costs are expensed as incurred.
Income tax
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income taxes. The benefits from net operating losses carried forward
may be impaired or limited in certain circumstances. In addition, a valuation allowance can be provided for deferred tax assets
when it is more likely than not that all or some portion of the deferred tax asset will not be realized. For both 2017 and 2016,
there is no federal or state income tax liability on those respective income tax returns.
Advertising costs
Advertising costs are charged to expense when incurred. Advertising expense was US$6,428 and US$36,725 for 2017
and 2016, respectively.
Shipping and handling
The Company reports the cost of shipping and handling as an operating expense. Shipping and handling expense was
US$95,537 and US$138,262 for 2017 and 2016, respectively.
24
Spectra Systems Corporation Annual report and accounts 2017Notes to the financial information continuedfor the years ended December 31, 2017 and 2016 Note C – Related party transactions
The Company sold phosphor products and received royalties amounting to approximately US$2,863,000 and US$2,684,000
for the years ended December 31, 2017 and 2016, respectively, to a company owned by a shareholder.
On September 30, 2015, the Company purchased certain assets from Solaris in exchange for US$213,917 in cash. The Company
also recorded US$184,000 in contingent payments based on a royalty payment arrangement for anticipated continuing business.
The agreement requires the Company to pay Solaris 10% of any revenues hereafter received by the Company from the commercial
exploitation of the assets. The Chief Executive Officer of Solaris is also the Chief Executive Officer of Spectra. During the year
ended December 31, 2017, the Company paid royalties of US$3,895 to Solaris. No royalty payments were made during the year
ended December 31, 2016.
Note D – Inventories
Inventories consist of the following:
Raw materials
Finished goods
Total
Less: reserve for excess and obsolete inventory
Note E – Property and equipment
Property and equipment consists of the following:
Laboratory equipment
Computer and office equipment
Furniture and fixtures
Leasehold improvements
Software
Manufacturing equipment
Total
Less: accumulated depreciation
December 31,
2017
2016
$
2,006,436 $
2,079,163
1,840,600
835,508
3,847,036
2,914,671
(92,426)
—
$
3,754,610 $
2,914,671
December 31,
2017
2016
$
666,550
$
655,335
328,034
114,354
352,157
136,850
1,487,849
1,470,046
340,937
340,937
1,221,851
1,897,755
4,159,575
4,853,080
(2,365,115)
(2,292,110)
$
1,794,460 $
2,560,970
Depreciation expense amounted to US$401,198 and US$436,573 for the years ended December 31, 2017 and 2016, respectively.
As part of its consolidation of East Providence operations (see note J), the Company disposed of US$331,227 and US$1,780,968
of fully depreciated equipment the years ended December 31, 2017 and 2016, respectively. During the year ended December 31, 2017,
the Company sold machinery and received proceeds of US$405,400. The Company recorded a loss of US$32,420 on the sale.
25
Annual report and accounts 2017 Spectra Systems Corporation33 Note F – Intangible assets
Intangible assets consist of the following:
Patents
Customer relationships
Non-compete agreements
Developed technology
Tradename
Trademarks
Goodwill
Total
Less: accumulated amortization
December 31,
2017
2016
$
2,834,431 $
2,503,041
3,043,000
3,043,000
188,440
188,440
1,502,000
1,502,000
30,000
123,448
30,000
90,547
2,468,863
2,468,863
10,190,182
9,825,891
(3,223,815)
(2,521,778)
$
6,966,367 $
7,304,113
Amortization expense amounted to US$702,190 and US$661,100 for the years ended December 31, 2017 and 2016, respectively.
Estimated amortization expense is as follows:
$
582,400
536,537
458,258
412,911
398,798
2,108,600
$
4,497,504
December 31,
2017
2016
$
19,141 $
18,897
132,250
—
123,675
3,155
$
151,391 $
145,727
Year ending
December 31,
2018
2019
2020
2021
2022
Thereafter
Note G – Other assets
Other assets consist of the following:
Rental deposits
Deferred contract costs
Other
26
Spectra Systems Corporation Annual report and accounts 2017Notes to the financial information continuedfor the years ended December 31, 2017 and 2016
Note H – Accrued expenses and other liabilities
Accrued expenses and other liabilities consist of the following:
Royalties
Employee compensation
Contingent costs
Sales allowance and rebates
Professional fees
Property and franchise taxes
Product warranty
Other
Note I – Income taxes
The approximate components of the income tax provision are as follows:
Income tax provision/(benefit) computed at:
Federal statutory rate – current
State statutory rate – current
Federal deferred
State deferred
Change in valuation allowance
Income tax benefit
December 31,
2017
2016
$
700,345 $
793,719
406,301
180,105
115,775
80,000
8,480
—
29,730
272,057
184,000
—
93,883
30,000
25,000
38,687
$
1,520,736 $
1,437,346
December 31,
2017
2016
$
1,204,000
$
351,000
212,000
(117,000)
(20,000)
62,000
90,000
16,000
(1,092,000)
(519,000)
$
187,000
$
—
A reconciliation of the statutory federal income tax rate with our effective income tax rate was as follows:
Statutory federal rate
State income taxes, net of income tax benefit
Remeasurement of deferred taxes
Non-deductible expenses and other
Change in valuation allowance
Effective tax rate
December 31,
2017
34.0%
0.2%
(35.3%)
(5.1%)
0.0%
(6.2%)
2016
34.0%
0.1%
0.0%
(28.1%)
(6.0%)
—
27
Annual report and accounts 2017 Spectra Systems Corporation33 Note I – Income taxes continued
Approximate deferred income tax assets are as follows:
Depreciation and amortization
Deferred revenue
Federal and state tax credits
Inventory
Bad debts
Net operating loss carryforward
Valuation allowance
Total deferred income tax assets
December 31,
2017
2016
$
(77,000) $
(153,000)
(349,000)
(492,000)
918,000
121,000
14,000
1,054,000
97,000
5,000
5,053,000
8,643,000
(4,455,000)
(8,165,000)
$
1,225,000
$
989,000
The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017. The Tax Act eliminates alternative minimum taxes
and lowers the federal corporate income tax rate from 34% to 21% effective January 1, 2018. The Company remeasured its net
deferred tax assets using the new federal corporate income tax rate and posted a one-time reduction of US$2.0 million
in deferred tax assets to reflect the lower realization rate to be applied commencing in 2018.
As of December 31, 2017, the Company has net operating loss carryforwards expiring between 2019 and 2036 for US federal
income tax purposes of approximately US$23,000,000 and US$150,000 expiring between 2018 and 2020 for state income
tax purposes. A valuation allowance has been established for US$4,455,000 and US$8,165,000 as of December 31, 2017
and 2016, respectively, for the deferred tax benefit related to those loss carryforwards and other deferred tax assets.
At December 31, 2017, the Company also had approximately US$920,000 of tax credit carryforwards that are available
to offset federal and state liabilities. The credits will begin to expire between 2019 and 2029 for federal and between
2019 and 2024 for state.
The utilization of the tax carryforwards described above are dependent upon future profitability prior to any expiration dates.
Additionally, alternative minimum taxes, if any, and substantial changes in ownership and tax laws and regulations may
substantially limit their realization.
The Company accounts for the effect of any uncertain tax positions based on a “more likely than not” threshold to the recognition
of the tax positions being sustained based on the technical merits of the position under scrutiny by the applicable taxing authority.
If a tax position or positions are deemed to result in uncertainties of those positions, the unrecognized tax benefit is estimated
based on a “cumulative probability assessment” that aggregates the estimated tax liability for all uncertain tax positions.
The Company is not currently under examination by any taxing jurisdiction. The Company’s federal and state income tax
returns are generally open for examination for three years following the date filed.
Note J – Commitments and contingencies
The Company is involved from time to time in litigation incidental to the conduct of its business. The Company is not currently
a party to any lawsuit or proceeding.
Lease commitments
The Company holds four real estate leases. The Company’s lease agreement for corporate office space expired September 30, 2012
and is now in a month-to-month arrangement. The Company signed a five-year lease agreement for manufacturing and warehouse
space in East Providence beginning in November 2013 and expiring in October 2022. To support the ICS business, the Company
signed a lease which has been extended through January 2019. The Company’s lease for laboratory space in East Providence
has been extended through May 31, 2020 for a portion of the space. During 2017, the Company vacated the remaining portion
of the space and consolidated its operations at its other East Providence locations. Rent expense was US$421,513 and US$434,591
for the years ended December 31, 2017 and 2016, respectively.
28
Spectra Systems Corporation Annual report and accounts 2017Notes to the financial information continuedfor the years ended December 31, 2017 and 2016 Note J – Commitments and contingencies continued
Lease commitments continued
Future minimum lease payments are as follows:
Year ending
December 31,
2018
2019
2020
2021
2022
$
248,379
233,708
166,940
120,817
102,770
$
872,614
License and supply agreements
In 1996, and subsequently amended in 1999 and 2002, the Company entered into a license agreement under which the Company
obtained a nonexclusive right to use certain technology through the term of the licensor’s patents on such technology. The last
of these patents expire during 2018. The license agreement contains provisions for royalties to be paid on sales of products
developed under the agreement. For the years ended December 31, 2017 and 2016, the Company recorded US$164,768
and US$185,191, respectively, in royalty expense.
Note K – Stockholders’ equity
Common and preferred stock
On July 25, 2011, the Company raised US$20,241,179, net of offering costs, on the London Stock Exchange in a placing
of 18,592,320 common shares at a placing price of £0.753 per new common share, representing 41.09% of the enlarged
common share capital of the Company. As a result of the offering, anti-dilution provisions found in the Company’s Amended
and Restated Certificate of Incorporation converted all of the issued and outstanding preferred shares into 17,185,052 common
shares, giving 26,659,050 common shares in issue at the time of the placing. At December 31, 2017 there were 45,434,754
common shares issued and outstanding and no preferred shares in issue.
Stock option plan
In May 2007, the Company adopted the 2007 Stock Plan (the “2007 Plan”), which provided for the grant of incentive stock
options and nonqualified stock options, stock awards and stock purchase rights for the purchase of up to 14,100,000 shares
of the Company’s common stock to officers, employees, consultants and Directors of the Company. The Board of Directors is
responsible for administration of the 2007 Plan. The Board determines the term of each option, the option exercise price, and
the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock options
may be granted to an officer or employee at an exercise price per share of not less than the fair value per common share on
the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s voting stock)
and with a term not to exceed ten years from the date of the grant (five years for incentive stock options granted to holders
of more than 10% of the Company’s voting stock). Nonqualified stock options may be granted to consultants or Directors at
an exercise price per share of not less than 85% of the fair value of the common stock. Stock options generally vest over three
years and are exercisable over a period up to ten years from the date of grant. As of December 31, 2017, options to purchase
5,588,830 shares of common stock were outstanding and options covering 255,000 shares of common stock have been
exercised under the 2007 Plan. As of December 31, 2017, 8,256,170 shares of common stock were available for grant under
the 2007 Plan.
29
Annual report and accounts 2017 Spectra Systems Corporation33
Note K – Stockholders’ equity continued
Stock option plan continued
Information related to stock options granted by the Company is summarized as follows:
December 31, 2017
December 31, 2016
Number of shares
under option
Weighted average
exercise price
Number of shares
under option
Weighted average
exercise price
Outstanding at beginning of year
7,047,414
$
Granted
Exercised
Forfeited/canceled
250,000
(255,000)
(1,453,584)
Outstanding at end of year
5,588,830
$
0.51
0.49
0.44
0.49
0.50
6,012,391
$
3,306,689
—
(2,271,666)
7,047,414
$
0.74
0.37
—
0.91
0.51
The following table summarizes information about stock options outstanding at December 31, 2017:
Exercise price range
US$0.30–US$0.84
US$0.85–US$1.23
Options outstanding
Options exercisable
Weighted
average
contractual life
(years)
Weighted
average
exercise price
Number of
shares
Weighted
average
exercise price
5.50
$
3.57
5.36
$
0.45
1.23
0.50
4,065,605
$
400,000
4,465,605
$
0.47
1.23
0.54
Number of
outstanding
shares
5,188,830
400,000
5,588,830
As of December 31, 2017, the weighted average contractual life for exercisable stock options was 4.56 years.
The Company’s stock price closed at US$1.12 (£0.835) on December 31, 2017. As of December 31, 2017, the aggregate intrinsic
value for outstanding and exercisable stock options was US$3,689,175 and US$2,771,969, respectively. Intrinsic value for stock
options is defined as the difference between the current market value of the stock and the exercise price. The intrinsic value
represents the value that would have been received by the option holders had the option holders exercised all of their options
as of that date.
The Company currently uses the Black-Scholes option pricing model to determine the fair value of its stock options.
The valuations determined using this model are affected by assumptions regarding a number of complex and subjective variables
including stock price, volatility, expected life of options, risk free interest rates, and expected dividends, if any. The Company recorded
stock-based compensation costs of US$122,956 and US$124,291 for the years ended December 31, 2017 and 2016, respectively.
There was no stock-based compensation expense capitalized during either year. During the year ended December 31, 2017,
the weighted average grant date fair value of stock options granted was US$0.49. The assumptions used to value stock
option grants are as follows for the year ended:
Risk free rate
Expected life (years)
Assumed volatility
Expected dividends
December 31,
2017
2.1%
6.00
84.7%
None
2016
0.7%
5.00
32.7%
None
As of December 31, 2017, there was approximately US$157,000 of unrecognized compensation cost, related to unvested
stock-based payments granted to our employees, Directors and consultants, which is expected to be recognized over a weighted
average period of 1.2 years. Total unrecognized compensation cost will be adjusted for future changes in forfeitures and
recognized over the remaining vesting periods of the stock grants.
30
Spectra Systems Corporation Annual report and accounts 2017Notes to the financial information continuedfor the years ended December 31, 2017 and 2016
Note L – Employee retirement plan
During 1999, the Company adopted a defined contribution plan, established under the guidelines of Section 401(k) of the
Internal Revenue Code (IRC), which covers all employees. Employees are eligible to participate in the employee retirement
plan (the “Plan”) at the beginning of the first month following the date of hire. Employees may contribute up to the maximum
allowed by the IRC of eligible pay on a pretax basis. The Company made a matching contribution of 50% of employee
contributions up to 4% of eligible salary. Company matching contributions vest at 25% after one year of service, 50% at the
end of two years of service and 100% at the end of three years of service. For the years ended December 31, 2017 and 2016,
the Company’s matching contributions were US$33,678 and US$39,482, respectively.
Note M – Business combinations
On January 29, 2016, the Company acquired certain specialty phosphor assets primarily used in the authentication of world
banknotes for total consideration of US$3,118,489. In addition to the assets, most importantly, the Company has acquired
long-standing customer relationships related to the assets including a major world supplier of banknote inks. The Company
will incorporate the acquired assets within its existing phosphor business and reports this acquisition as part of its
Authentication Systems segment.
The following tables provide further details of this acquisition:
Assets acquired
Inventories
Goodwill
Customer relationships (15-year amortization period)
Developed technology (ten-year amortization period)
Non-compete agreement (three-year amortization period)
233,489
964,000
1,050,000
860,000
11,000
3,118,489
Note N – Segment reporting
In accordance with ASC 280, management has identified three operating segments. The first is the Authentication Systems
Group, which captures the hardware, software and materials related to the authentication of banknotes, tax stamps and other
high-value goods. The second segment is the Secure Transactions Group, which provides an Internal Control System (ICS)
software offering to the lottery and gaming industries. ICS provides tools for fraud, money laundering and match fixing
detection, as well as statistical analysis. The third segment is the Banknote Cleaning Group, which captures the technology
related to cleaning soiled banknotes.
Information for each reportable segment as of December 31, 2017 and 2016 is as follows:
Gross
revenue
Income/(loss)
from operations
Depreciation and
amortization
Capital
expense
Segment
assets
2016
Secure Transactions
$
1,274,211
$
350,686
$
205,433
$
16,206
$
2,563,557
Authentication Systems
9,847,408
Banknote Cleaning
—
791,399
(50,000)
Total
$ 11,121,619
2017
Secure Transactions
$
1,347,010
$
$
1,092,085
398,060
$
$
Authentication Systems
10,822,762
2,712,999
Banknote Cleaning
—
(80,487)
849,539
42,701
1,097,673
207,568
847,753
48,067
$
$
40,000
73,440
23,165,251
895,276
129,646
$ 26,624,084
2,129
$
2,219,415
69,147
25,023,252
—
469,948
Total
$ 12,169,772 $
3,030,572
$
1,103,388
$
71,276
$ 27,712,615
31
Annual report and accounts 2017 Spectra Systems Corporation33
Note O – Earnings per share
The calculation of basic earnings per share is based on the net income divided by the weighted average number of common
shares outstanding. Diluted earnings per share is calculated by considering the dilutive impact of common stock equivalents
under the treasury stock method as if they were converted into common stock as of the beginning of the period or as of the
date of grant, if later. Excluded from the calculation of diluted earnings per common share for the years ended December 31, 2017
and 2016 were 400,164 and 8,725,673 shares, respectively, related to stock options because their exercise prices would render
them anti-dilutive. The following table shows the calculation of basic and diluted earnings per common share:
Numerator
Net income
Denominator
December 31,
2017
December 31,
2016
$
3,280,082 $
1,139,053
Weighted average number of common shares outstanding
45,369,084
45,251,370
Effect of dilutive securities
Stock options
2,512,699
46,000
Diluted weighted average number of common shares outstanding
47,881,783
45,297,370
Earnings per common share
Basic
Diluted
$
$
0.07
0.07
$
$
0.03
0.03
Note P – Subsequent events
The Company evaluated all events or transactions that occurred through March 28, 2018, the date these financial statements
were available to be issued.
On March 19, 2018, the Company declared a dividend of US$0.06 per share to be paid on or around June 29, 2018 to
shareholders of record as of June 8, 2018.
During January 2018, the Company executed an exclusive, worldwide, licensing agreement for one of its existing products
which is currently in use by 18 central banks through an existing licensee, a major supplier of banknotes worldwide. The licensing
agreement will extend the rights to the underlying technology, which has been in use since 2003, in perpetuity and generate
US$11.2 million in royalty payments over the next five years. The payments will be settled in eleven equally spaced payments.
In addition, the Company also executed a Material Supply Agreement with the same licensee to continue to provide it with
covert materials, exclusively, for a period of ten years at reduced rates relative to the current agreement.
32
Spectra Systems Corporation Annual report and accounts 2017Notes to the financial information continuedfor the years ended December 31, 2017 and 2016 Shareholder and corporate information
Registered office
Spectra Systems Corporation
321 South Main Street, Suite 102
Providence, RI 02903
United States of America
+1 401 274 4700
Nominated Advisor
WH Ireland Limited
24 Martin Lane
London EC4R 0DR
United Kingdom
+44 (0) 207 220 1666
Broker
WH Ireland Limited
24 Martin Lane
London EC4R 0DR
United Kingdom
+44 (0) 207 220 1666
Auditor and Reporting Accountants
Miller Wachman LLP
100 Cambridge Street, 13th Floor
Boston, MA 02114
United States of America
+1 617 338 6800
English Law Legal Counsel
Covington & Burling LLP
265 Strand
London WC2R 1BH
United Kingdom
+44 (0) 207 067 2000
US Based Legal Counsel
Adler, Pollock & Sheehan, PC
One Citizens Plaza, 8th Floor
Providence, RI 02903
United States of America
+1 401 274 7200
Registrar
Computershare Investor Services PLC
2nd Floor
Vintners’ Place
68 Upper Thames Street
London EC4V 3BJ
+44 (0) 870 703 0300
33
Annual report and accounts 2017 Spectra Systems Corporation33 S
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Spectra Systems Corporation
321 South Main Street, Suite 102
Providence, RI 02903
United States of America
+1 401 274 4700
email: info@spsy.com
www.spsy.com